Spruce Dictionary of Terms

What does that word mean?

Have you come across a word (or five) that doesn’t quite make sense to you? We understand that learning about mortgages and refinancing can be tricky, which is why we’ve provided this our “Spruce Dictionary.” Scroll down through our list of terms and phrases, or jump to different definitions using the alphabet links below to start deciphering the confusing mortgage lender and refinancing lingo.

A

ARM: Adjustable Rate Mortgage; a mortgage loan that does not have a fixed interest rate.a mortgage loan subject to changes in interest rates after a period of time usually 3, 5, or 7 years; ARM monthly payments increase or decrease at intervals determined by an index and a margin that is added to the rate; the change is usually subject to a cap.

Amortization: a payment plan that enables you to reduce your debt gradually through monthly payments. The payments may be principal and interest, or interest-only. The monthly amount is based on the schedule for the entire term or length of the loan.

Annual Percentage Rate (APR): A tool used to compare loans across different lenders. The Federal Truth-in-Lending law requires mortgage companies to disclose the APR when they advertise a rate. It is designed to represent the true cost of the loan to the borrower, expressed in the form of a yearly rate. The purpose is to prevent lenders from hiding fees and upfront costs behind low advertised interest rates. APR is a higher rate than the simple interest of the mortgage.

Application: the first step in the official loan approval process; this form is used to record important information about the potential borrower necessary to the underwriting process.

Appraisal: a document from a professional that gives an estimate of a property’s fair market value based on the sales of comparable homes in the area and the features of a property; an appraisal is required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.

Assets: any item with measurable value. For mortgage loans usually means bank, stock, and retirement accounts.

Automated Underwriting: A computer-driven process for informing the loan officer very quickly whether the applicant will be approved or whether the application will be forwarded to an underwriter. The immediate decision is based on information provided by the applicant. This information is subject to later review by an underwriter and receipt of subject property information. This system removes the possibility of personal bias against the buyer.

B

Back End Ratio (debt ratio): a ratio that compares the total of all monthly debt payments (mortgage, real estate taxes and insurance, car loans, and other consumer loans) to gross monthly income.

Balloon Loan or Mortgage: a mortgage that typically offers low rates for an initial period of time (usually 5, 7, or 10) years; after that time period elapses, the balance is due or is refinanced by the borrower.

Borrower: a person who has been approved to receive a loan and is then obligated to repay it and any additional fees according to the loan terms.

Broker: Mortgage brokers are individuals in the business of arranging funding or negotiating contracts for a client, but who does not loan the money. A real estate broker is someone who helps find a house.

Buy Down: the seller pays an amount to the lender so the lender provides a lower rate and lower payments many times for an ARM. The seller may increase the sales price to cover the cost of the buy down.

C

Cap: a limit, such as one placed on an adjustable rate mortgage, on how much a monthly payment or interest rate can increase or decrease, either at each adjustment period or during the life of the mortgage.

Cash-Out Refinance: when a borrower refinances a mortgage at a higher principal amount to get additional money.

Closing: the final step in property purchase where the title is transferred from the seller to the buyer. Closing occurs at a meeting between the buyer, seller, settlement agent, and other agents. At the closing the seller receives payment for the property. Also known as settlement.

Closing Costs: fees for final property transfer not included in the price of the property. Typical closing costs include charges for the mortgage loan such as origination fees, discount points, appraisal fee, title insurance, legal fees, real estate professional fees, prepayment of taxes and insurance, and real estate transfer taxes.

Co-Borrower: an additional person that is responsible for loan repayment and is listed on the title.

Co-Signer or Non-Occupant Co-borrower: a person that signs a credit application with another person, agreeing to be equally responsible for the repayment of the loan.

Compensating Factors: factors that show the ability to repay a loan based on less traditional criteria, such as employment, rent, and utility payment history.

Condominium: a form of ownership in which individuals purchase and own a unit of housing in a multi-unit complex. The owner also shares financial responsibility for common areas.

Conforming loan: is a loan that does not exceed Fannie Mae’s and Freddie Mac’s loan limits. Freddie Mac and Fannie Mae loans are referred to as conforming loans. $417,000 is the maximum for a single family loan limit.

Conventional Loan: a private sector loan, one that is not guaranteed or insured by the U.S. government.

Credit: an agreement that a person will borrow money and repay it to the lender over time.

Credit Bureau: an agency that provides financial information and payment history to lenders about potential borrowers. Also known as a National Credit Repository.

Credit Report: a report generated by the credit bureau that contains the borrower’s credit history for the past seven years. Lenders use this information to determine if a loan will be granted.

Credit Score or FICO score: a score calculated by using a person’s credit report to determine the likelihood of a loan being repaid on time. Scores range from about 360 – 840: a lower score meaning a person is a higher risk, while a higher score means that there is less risk.

D

Debt-to-Income Ratio: a comparison or ratio of gross income to housing and non-housing expenses.

Deed: a document that legally transfers ownership of property from one person to another. The deed is recorded on public record with the property description and the owner’s signature. Also known as the title.

Deposit (Earnest Money): money put down by a potential buyer to show that they are serious about purchasing the home; it becomes part of the down payment if the offer is accepted.

Discount Point: discount points are paid to reduce the interest rate on a loan.

Down Payment: the portion of a home’s purchase price that is paid in cash and is not part of the mortgage loan. This amount varies based on the loan type, but is determined by taking the difference of the sale price and the actual mortgage loan amount. Mortgage insurance is required when a down payment less than 20 percent is made.

E

Earnest Money (Deposit): money put down by a potential buyer to show that they are serious about purchasing the home; it becomes part of the down payment if the offer is accepted.

Equal Credit Opportunity Act (ECOA): a federal law requiring lenders to make credit available equally without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.

Equity: an owner’s financial interest in a property; calculated by subtracting the amount still owed on the mortgage loon(s)from the fair market value of the property.

Escrow: funds held in an account to be used by the lender to pay for home insurance and property taxes. The funds may also be held by a third party until contractual conditions are met and then paid out.

F

FICO Score: FICO is an abbreviation for Fair Isaac Corporation and refers to a person’s credit score based on credit history. Lenders and credit card companies use the number to decide if the person is likely to pay his or her bills. A credit score is evaluated using information from the three major credit bureaus and is usually between 300 and 850.

FSBO (For Sale by Owner): a home that is offered for sale by the owner without the benefit of a real estate professional.

Fair Credit Reporting Act: federal act to ensure that credit bureaus are fair and accurate protecting the individual’s privacy rights enacted in 1971 and revised in October 1997.

Fair Housing Act: a law that prohibits discrimination in all facets of the home buying process on the basis of race, color, national origin, religion, sex, familial status, or disability.

Fannie Mae: Federal National Mortgage Association (FNMA); Government sponsored agencies that are the largest purchasers of mortgage-backed securities. Lenders and banks that sell mortgages on the secondary market are typically selling to Fannie Mae or Freddie Mac and must conform to their guidelines. These loans have access to the best rates and terms. Also known as a Government Sponsored Enterprise (GSE).

FHA: Federal Housing Administration; assists homebuyers by providing mortgage insurance to lenders to cover most losses that may occur when a borrower defaults; this encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.

First Mortgage: the mortgage with first priority if the loan is not paid.

Fixed-Rate Mortgage: a mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed and do not change.

Float: the act of allowing an interest rate and discount points to fluctuate with changes in the market.

Flood Insurance: insurance that protects homeowners against losses from a flood; if a home is located in a flood plain, the lender will require flood insurance before approving a loan.

Freddie Mac: Federal Home Loan Mortgage Corporation (FHLM); Government sponsored agencies that are the largest purchasers of mortgage-backed securities. Lenders and banks that sell mortgages on the secondary market are typically selling to Fannie Mae or Freddie Mac and must conform to their guidelines. These loans have access to the best rates and terms. Also known as a Government Sponsored Enterprise (GSE).

Front End Ratio: a percentage comparing a borrower’s total monthly cost to buy a house (mortgage principal and interest, insurance, and real estate taxes) to monthly income before deductions.

G

Gross Income: money earned before taxes and other deductions. Sometimes it may include income from self-employment, rental property, alimony, child support, public assistance payments, and retirement benefits.

H

Hazard Insurance: AKA Home insurance. protection against a specific loss, such as fire, wind etc., over a period of time that is secured by the payment of a regularly scheduled premium.

Home Equity Line of Credit: a mortgage loan, usually in second mortgage, allowing a borrower to obtain cash against the equity of a home, up to a predetermined amount.

Home Equity Loan: a loan backed by the value of a home (real estate). This usually has second or subordinate position. The borrower can usually claim a home equity loan as a tax deduction.

Home Inspection: an examination of the structure and mechanical systems to determine a home’s quality, soundness and safety; makes the potential homebuyer aware of any repairs that may be needed. The homebuyer generally pays inspection fees.

Homeowner’s Insurance: an insurance policy, also called hazard insurance, that combines protection against damage to a dwelling and its contents including fire, storms or other damages with protection against claims of negligence or inappropriate action that result in someone’s injury or property damage. Lenders require homeowners insurance and may escrow the cost.

HUD: the U.S. Department of Housing and Urban Development; HUD the administrator for FHA mortgages.

HUD1 Statement: also known as the “settlement sheet,” or “closing statement” it itemizes all closing costs; must be given to the borrower at or before closing. Items that appear on the statement include real estate commissions, loan fees, points, and escrow amounts.

I

Index: the measure of interest rate changes that the lender uses to decide how much the interest rate of an ARM will change over time. No one can be sure when an index rate will go up or down.

Inquiry: a credit report request. Each time a credit application is completed or more credit is requested counts as an inquiry. A large number of inquiries on a credit report can sometimes make a credit score lower.

Interest: a fee charged for the use of borrowing money.

Interest Rate: the amount of interest charged on a monthly loan payment, expressed as a percentage.

Insurance: protection against a specific loss, such as fire, wind etc., over a period of time that is secured by the payment of a regularly scheduled premium.

J

Jumbo Loan: or non-conforming loan, is a loan that exceeds Fannie Mae’s and Freddie Mac’s loan limits, greater than $417,000 on a single family home.

L

Liabilities: a person’s financial obligations such as long-term / short-term debt, and other financial obligations to be paid.

Liability Insurance: insurance coverage that protects against claims alleging a property owner’s negligence or action resulted in bodily injury or damage to another person. It is normally included in homeowner’s insurance policies.

Lien: a legal claim against property that must be satisfied when the property is sold. A lien is a defect on the title and needs to be settled before transfer of ownership.

Life Cap: a limit on the range interest rates can increase or decrease over the life of an adjustable-rate mortgage (ARM).

Line of Credit: an agreement by a financial institution such as a bank to extend credit up to a certain amount for a certain time to a specified borrower.

Loan: money borrowed that is usually repaid with interest.

Loan Estimate: an estimate of all closing fees including pre-paid and escrow items as well as lender charges; must be given to the borrower within three days after submission of a loan application.

Loan Officer: a representative of a lending or mortgage brokerage company.

Loan Origination Fee: a charge that can reduce the interest rate of loan or due to adjustments due to down payment, credit score. This charge is paid at the closing and varies with the lender and type of loan.

Loan to Value (LTV) Ratio: a percentage calculated by dividing the amount borrowed by the price or appraised value of the home to be purchased; the higher the LTV, the less cash a borrower is required to pay as down payment.

Lock-in Period: the length of time that the lender has guaranteed a specific interest rate to a borrower.

M

Margin: the number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment.

Mortgage: a lien on the property that secures the Promise to repay a loan. The mortgage gives the lender the right to collect payment on the loan and to foreclose if the loan obligations are not met.

Mortgage-Backed Security (MBS): a financial security instrument that represents an undivided interest in a group of mortgages. The buying and selling of these on the secondary market determine the interest rates.

Mortgage Broker: a firm that originates and processes loans for a number of lenders.

Mortgage Insurance: a policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home’s purchase price.

Mortgage Note: a legal document obligating a borrower to repay a loan at a stated interest rate during a specified period; the agreement is secured by a mortgage that is recorded in the public records along with the deed.

N

Negative Amortization: amortization means that monthly payments are large enough to pay the interest and reduce the principal on your mortgage. Negative amortization occurs when the monthly payments do not cover all of the interest cost.

No Cash Out Refinance: a refinance of an existing loan only for the amount remaining on the mortgage. The borrower does not get any cash against the equity of the home. Also called a “rate and term refinance.”

No Cost Loan: there are many variations of a no cost loan. Generally, it is a loan that does not charge for items such as title insurance, escrow fees, settlement fees, appraisal, recording fees or notary fees. It may also offer no points. This lessens the need for upfront cash during the buying process however no cost loans have a higher interest rate.

Note: a legal document obligating a borrower to repay a mortgage loan at a stated interest rate over a specified period of time.

O

Origination: the process of preparing, submitting, and evaluating a loan application; generally includes a credit check, verification of employment, and a property appraisal.

Origination Fee: the charge for originating a loan; is usually calculated in the form of points and paid at closing. One point equals one percent of the loan amount.

P

PITI: Principal, Interest, Taxes, and Insurance: the four elements of a monthly mortgage payment; payments of principal and interest go directly towards repaying the loan while the portion that covers taxes and insurance (homeowner’s and mortgage, if applicable) goes into an escrow account to cover the fees when they are due.

PMI: Private Mortgage Insurance; privately-owned companies that offer standard and special affordable mortgage insurance programs for qualified borrowers with down payments of less than 20% of a purchase price.

Payment Cap: a limit on how much an ARM’s payment may increase, regardless of how much the interest rate increases.

Planned Unit Development (PUD): a development that is planned, and constructed as one entity. Generally, there are common features in the homes or lots governed by covenants attached to the deed. Most planned developments have common land and facilities owned and managed by the owner’s or neighborhood association. Homeowners usually are required to participate in the association via a payment of annual dues and insurance.

Points: a point is equal to one percent of the principal amount of your mortgage and generally pay down the interest rate.

Power of Attorney: a legal document that authorizes another person to act on your behalf. A power of attorney can grant complete authority or can be limited to certain acts or certain periods of time or both.

Pre-Approval: a lender commits to lend to a potential borrower a fixed loan amount based on a completed loan application, credit reports, debt, and savings.

Prepayment: any amount paid to reduce the principal balance of a loan before the due date or payment in full of a mortgage.

Prepayment Penalty: a provision in some loans that charge a fee to a borrower who pays off a loan before it is due. There are NO prepayment penalties on any products Spruce provides.

Pre-Qualify: a lender informally determines the maximum amount an individual is eligible to borrow. This is not a guaranty of a loan.

Principal: the amount of money borrowed to buy a house or the amount of the loan that has not been paid back to the lender. This does not include the interest paid to borrow that money.

Promissory Note: a written promise to repay a specified amount over a specified period of time.

Property Tax: a tax charged by local government and used to fund municipal services such as schools, police, or street maintenance. The amount of property tax is determined locally by a formula, usually based on a percent per $1,000 of assessed value of the property.

Q

Qualifying Ratios: guidelines utilized by lenders to determine how much money a homebuyer is qualified to borrow. Lending guidelines typically include a maximum housing expense to income ratio and a maximum monthly expense to income ratio.

Quitclaim Deed: a deed transferring ownership of a property but does not make any guarantee of clear title.

R

RESPA: Real Estate Settlement Procedures Act; a law protecting consumers from abuses during the residential real estate purchase and loan process by requiring lenders to disclose all settlement costs, practices, and relationships

Rate Cap: a limit on an ARM on how much the interest rate or mortgage payment may change. Rate caps limit how much the interest rates can rise or fall on the adjustment dates and over the life of the loan.

Rate Lock: a commitment by a lender to a borrower guaranteeing a specific interest rate over a period of time at a set cost.

Real Estate Agent/Realtor: an individual who is licensed to negotiate and arrange real estate sales; works for a real estate broker.

Recording: the recording in a registrar’s office of an executed legal document. These include deeds, mortgages, satisfaction of a mortgage, or an extension of a mortgage making it a part of the public record.

S

Second Mortgage: an additional mortgage on property. In case of a default the first mortgage must be paid before the second mortgage. Second loans are more risky for the lender and usually carry a higher interest rate.

Secured Loan: a loan backed by collateral such as property.

Servicer: a business that collects mortgage payments from borrowers and manages the borrower’s escrow accounts.

Settlement Statement: a document required by the Real Estate Settlement Procedures Act (RESPA). It is an itemized statement of services and charges relating to the closing of a property transfer. The buyer has the right to examine the settlement statement 1 day before the closing. This is called the HUD 1 Settlement Statement.

Subordinate: to place in a rank of lesser importance or to make one claim secondary to another.

T

Terms: The period of time and the interest rate agreed upon by the lender and the borrower to repay a loan.

Title: a legal document establishing the right of ownership and is recorded to make it part of the public record. Also known as a Deed.

Title Company: a company that specializes in examining and insuring titles to real estate.

Title Insurance: insurance that protects the lender against any claims that arise from arguments about ownership of the property; also available for homebuyers. An insurance policy guaranteeing the accuracy of a title search protecting against errors. Most lenders require the buyer to purchase title insurance protecting the lender against loss in the event of a title defect. This charge is included in the closing costs. A policy that protects the buyer from title defects is known as an owner’s policy and requires an additional charge.

Title Search: a check of public records to be sure that the seller is the recognized owner of the real estate and that there are no unsettled liens or other claims against the property.

Transfer Taxes: State and local taxes charged for the transfer of real estate. Usually equal to a percentage of the sales price.

Truth-in-Lending: a federal law obligating a lender to give full written disclosure of all fees, terms, and conditions associated with the loan initial period and then adjusts to another rate that lasts for the term of the loan.

U

Underwriting: the process of analyzing a loan application to determine the amount of risk involved in making the loan; it includes a review of the potential borrower’s credit history and a judgment of the property value.

V

VA (Department of Veterans Affairs): a federal agency, which guarantees loans made to veterans; similar to mortgage insurance, a loan guarantee protects lenders against loss that may result from a borrower default.

VA Mortgage: a mortgage guaranteed by the Department of Veterans Affairs (VA).

W

Warranty Deed: a legal document that includes the guarantee the seller is the true owner of the property, has the right to sell the property and there are no claims against the property.